Buy International Paper (NYSE:IP) 4.75% Yield, But Wait For A Pullback

A Melt-Up In Paper Lifts International Paper To New Highs

There is a melt-up occurring in International Paper (NYSE:IP) that has yet to run its course. Not only is the company well-positioned for the pandemic but conditions within the industry have it set up for big gains. You might be thinking paper, hmm, how is paper well-positioned for the pandemic? Well, let me tell you. The pandemic has accelerated the use of omnichannel commerce. Omni-channel commerce hinges on eCommerce which is, arguably paper-free, but execution hinges on the packaging. Packaging that International Paper is happy to supply.

The latest news is another positive nod from the analyst’s community, one that has shares up another 3.25%. Wells Fargo says the company is benefiting from stay-at-home trends and it is not the only Wall Street firm to say so. Bank of America thinks the market is underestimating the impact of eCommerce on the containerboard market and was the first to hint at a possible price hike for fiscal 2021. Wells Fargo, in its note to shareholders, raised the stock to an Overweight rating and raised the price target to the Wall Street high of $52 or 20% upside.

"IP is reaping benefits from increased food-at-home consumption and accelerated adoption of delivery-to-home activity (including FMCG and takeout food) in its Industrial Packaging segment. Additionally a tight inventory position, building backlogs, and potential for input cost inflation into 2021 is paving the way for a $40-50/ton linerboard price increase."

International Paper Is A High-Yield Value Stock

International Paper is trading about 17X this year’s earnings and 16X next. This puts it at a discount to the broad market average which is near 20X forward earnings and there are other factors to consider. With the company positioned for strength, the consensus targets are most likely too low for this year and next which suggests an even lower valuation for the stock. Add in the chances for price hikes and the valuation is even lower.

Adding to the value is the dividend. The stock is yielding close to 4.75% with prices trading near $43.75 and it is a relatively safe payment. The payout ratio is a bit high but that is OK for a company not focused so much on growth as it is profitability and shareholder returns. The company has a solid balance sheet and a 10-year history of increases that suggest the payment will at least hold steady if not increase it when it next declares. International Paper is due for a distribution increase this month and it will probably be in the mid-single-digit range.

The average analyst rating is only a neutral but I don’t think that reflects the true sentiment. There are quite a few older, neutral, and bearish ratings that are overshadowed by a more recent trend. Over the past 90 days this company has picked up five new analysts and three are bullish.

International Paper Breaks Out To A New High

The Wells Fargo upgrade has shares of International Paper up more than 3.0% in early trading and at a new high. The move looks strong and is supported by the indicators so further upside should be expected. The next best target is near the 2019/2020 high of $48. If that level can be surpassed, this stock may be in for a much bigger move possibly up to the $64 or about 50% upside from current price action. The caveat is that price action formed a large gap at the open and that leaves the door open for a pullback to support before the rally can be sustained.